Lewis Two-Sector Model

Definition

The Lewis Two-Sector Model is an economic theory proposed by economist Arthur Lewis, which describes the dual economy found in developing countries. It illustrates the transition of labor from a traditional agricultural sector to a modern industrial sector, highlighting the differences in productivity and wage levels between these two sectors, and how this transition is crucial for economic development.

5 Must Know Facts For Your Next Test

1. The Lewis Two-Sector Model emphasizes the role of surplus labor in the agricultural sector, allowing for a transfer of workers to the industrial sector without reducing agricultural output.
2. This model suggests that as labor moves to the industrial sector, wages will eventually rise due to increased demand for workers, leading to overall economic growth.
3. It highlights that the initial phase of economic development may involve low wages in the industrial sector until it reaches a point where it can attract more skilled labor.
4. The model predicts that industrialization will lead to higher productivity, which can help raise living standards in developing countries over time.
5. The success of the Lewis Two-Sector Model relies on factors such as capital accumulation, investment in infrastructure, and favorable government policies to stimulate industrial growth.

Review Questions

• How does the Lewis Two-Sector Model illustrate the process of labor movement between sectors in developing economies?
  • The Lewis Two-Sector Model shows that labor transitions from a low-productivity agricultural sector to a high-productivity industrial sector. Initially, surplus labor exists in agriculture, allowing workers to move without reducing agricultural output. As more workers join the industrial sector, productivity increases and wages start to rise, eventually transforming the economy as labor continues to shift toward industries that can generate higher income and development.
• What are some implications of the Lewis Two-Sector Model for policymakers in developing countries aiming for economic growth?
  • Policymakers need to recognize that fostering a strong industrial sector is essential for economic growth according to the Lewis Two-Sector Model. They should focus on creating an environment conducive to industrialization through investment in infrastructure, providing incentives for businesses, and ensuring access to education and training. By doing so, they can help facilitate the movement of labor from agriculture to industry, which is crucial for increasing productivity and improving living standards.
• Evaluate how well the Lewis Two-Sector Model addresses challenges faced by modern developing economies today.
  • While the Lewis Two-Sector Model provides valuable insights into labor movement and industrialization, it may not fully address contemporary challenges such as technological change and globalization. In today's economy, sectors can change rapidly due to advancements in technology, which may disrupt traditional pathways of development outlined by Lewis. Additionally, global market forces can affect local industries in ways not accounted for by the original model, suggesting that while useful, it requires adaptation to remain relevant for current economic conditions.

Related terms

Dual Economy: An economic model that divides an economy into two separate sectors, typically the traditional sector with low productivity and the modern sector with higher productivity and wages.

Marginal Productivity of Labor: The additional output that is produced by employing one more unit of labor, which tends to be higher in the modern industrial sector compared to the agricultural sector.

Economic Development:

The process by which a nation improves the economic, political, and social well-being of its citizens, often characterized by growth in income and employment opportunities.